Rajesh Projects (India) Pvt. Ltd vs. CIT (Delhi High Court)

(i) That brings the court to the next question, which is as to the nature of the payments made towards lease. Do they constitute rent so as to attract Section 194-I? The court is of opinion that clearly these payments are not “rent”. That they are annual payments cannot be doubted. Yet, part of the payment is clearly capital in nature. Clause 1 of the lease deeds entered into in each of the cases, clearly points to the fact that a small percentage of the agreed amounts were paid as part of the lease premium and were towards acquisition of the asset; they fell, consequently in the capital stream and were not “rents”. The balance of such premium payments were spread over a period of 8 to 10 years, in specified annual or bi-annual installments. Here, distinction between a single payment made at the time of the settlement of the demised property and recurring payments made during the period of its enjoyment by the lessee is to be made. This distinction is clearly recognized in Section 105 of the Transfer of Property Act, which defines both premium and rent. Such payments were held to constitute capital and not “rent” or advance rent, in Durga Das Khanna v CIT 1969 (72) ITR 796 as well as other decisions, such as Assam Bengal Cement Co. Ltd. v Commissioner of Income Tax, West Bengal [1955] 27 ITR 34 (SC) and Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 225 ITR 802 (SC). However, in respect of amounts clearly reserved as rent (generally 1% of the total consideration, payable annually) the payments are clearly rent and not capital. In respect of such amounts too, the petitioners were liable to deduct TDS from the payments made to GNOIDA. This view is also reinforced by the Income Tax Circular No. 35/2016 dated 13 October, 2016 issued by the Central Board of Direct Taxes (CBDT) which clarified that ―lump sum lease payments or one time lease charges, which are not adjustable against long term lease hold charges, which are not adjustable against periodic rent, paid or paid or payable for acquisition of long term leasehold rights over land or any other property are not payments in the nature of rent within the meaning of Section 194-I of the Act.

(ii) As far as interest on overdue payments or other such amounts are concerned, however, they cannot be called “capital” payments. In the present case, the court holds that since the GNOIDA insisted that its payments not be subjected to TDS, it should ensure that the appropriate amounts are credited, or credit to the extent applicable, is given to the Petitioner/ lessees. A direction to that effect is given to the second respondent, GNOIDA to ensure compliance; the Revenue is consequently directed not to pursue coercive and penal proceedings against the petitioners under Section 201/221 of the Income Tax Act.

(iii) Amounts paid as part of the lease premium in terms of the time-schedule(s) to the Lease Deeds executed between the petitioners and GNOIDA, or bi-annual or annual payments for a limited/specific period towards acquisition of lease hold rights are not subject to TDS, being capital payments;

(iv) Amounts constituting annual lease rent, expressed in terms of percentage (e.g. 1%) of the total premium for the duration of the lease, are rent, and therefore subject to TDS. Since the petitioners could not make the deductions due to the insistence of GNOIDA, a direction is issued to the said authority (GNOIDA) to comply with the provisions of law and make all payments, which would have been otherwise part of the deductions, for the periods, in question, till end of the date of this judgment. All payments to be made to it, henceforth, shall be subject to TDS.

(v) Amounts which are payable towards interest on the payment of lump sum lease premium, in terms of the Lease which are covered by Section 194-A are covered by the exemption under Section 194A (3) (f) and therefore, not subjected to TDS.

(vi) For the reason mentioned above, any payment of interest accrued in favour of GNOIDA by any petitioner who is a bank – to the GNOIDA, towards fixed deposits, are also exempt from TDS.